Elon Musk can’t use Twitter bots to get out of acquisition deal

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The top-to-bottom saga of Elon Musk’s bid to acquire Twitter took a turn this week that many had long suspected: Tesla’s CEO tweeted something saying the deal was in jeopardy.

Musk said in a tweet Friday morning that the deal was temporarily on hold, pending an investigation into the number of “spam/fake», accounts that exist on Twitter. He later clarified that he was still serious about acquisition.

Two people familiar with the deal who spoke on condition of anonymity because they are not authorized to speak publicly said the tweet reflected an effort by Musk to lower the $44 billion price tag. This amount was settled before the stock market crashed in recent weeks, making the acquisition price comparatively more expensive.

These so-called “bot” accounts that he worried about represent a financial risk for Twitter. Musk said he intends to remove those accounts when he completes his acquisition of the company. But bots generate revenue like normal accounts, through viewing the same ads. If there are more fake accounts than Twitter is letting on, it would mean lower revenue if they get taken down.

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Musk, whose net worth has plummeted by around $50 billion in recent weeks as markets rattled Tesla and other tech stocks, is free to walk out of the deal if he feels cold. Much of Musk’s wealth comes from his 17% stake in Tesla. The electric car company is now worth nearly $800 billion. Musk funded the majority of his Twitter acquisition but still has to put together $21 billion, which he aims to compensate with external investments.

But even if Musk finds that Twitter is grossly understating the number of bots on its service, Musk will likely have to pay $1 billion for killing the deal, legal experts say. And if it backs out of the deal, it would likely face a lawsuit from Twitter, which could seek heavy financial damages for the turmoil Musk has caused since agreeing to acquire it.

Musk and Twitter did not respond to requests for comment.

Musk secretly started buying shares on Twitter earlier this year before publicly disclosing that he had acquired more than nine percent of the company. Initially, he agreed to take a position on the company’s board of directors and cap his stake in the company, but he soon reversed his position and made an offer to acquire the entire company. company, an offer Twitter’s board accepted late last month after Musk failed to secure funding for the deal.

Like most merger deals, Twitter’s contract with Musk contains a “Material Adverse Effect” clause. Essentially, the clause means that if something significant happens to Twitter before the deal is made, and it affects the company’s long-term business in a major way, the deal can be terminated.

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Robots just won’t cut it, said Urska Velikonja, a law professor at Georgetown University School of Law. “If he tries to plead, he loses,” she said.

Twitter has long said that about five percent of its users are bots, but that number has come under scrutiny, and several reports over the years have suggested it’s much higher. And because Musk himself has promised to fix Twitter’s bot problem, he’d be hard pressed to argue that an abundance of bots on Twitter is anything he didn’t already know when he made the offer. .

Velikonja said there have been very few, if any, instances where an acquirer has successfully argued in court that a material adverse change has occurred. The historical example, she said, was a decision in 2018 in favor of Fresenius SE, which had agreed to acquire generic drug maker Akorn, Inc.

After agreeing to acquire the company for $4.75 billion, Akorn said it received information from an anonymous whistleblower claiming that Akorn failed to meet regulatory requirements and withheld such information from its acquirers. In a rare ruling, the judge hearing the case said “gross inaccuracies” provided by Akorn were grounds for terminating the deal. Akorn did not respond to a request for comment.

In 2020, luxury holding company LVMH Moet Hennessy Louis Vuitton SE backed out of its deal to acquire Tiffany & Co. for $16 billion in the wake of the global pandemic. Even the pandemic was not sufficient justification. LVMH claimed that the French government, where LVMH is based, had blocked the deal. Tiffany filed a complaint anyway. The two companies finally closed the deal earlier this year for $16.8 billion.

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Musk may have no legal ground to stand on, but it can still be worth a shot. Simply tweeting that the deal was “pending” sent the stock price plummeting on Twitter. If Musk pulls out of the deal, Twitter will be worse off than before the deal with a falling stock price, a shaken management team and an uncertain future. Any damage Twitter is able to recover from Musk in a long, drawn-out lawsuit will be small consolation.

Musk has a history of using Twitter to move markets, which in some cases has caught the attention of regulators. He tweeted in 2018 that he secured funding to take Tesla private at $420 per share. The SEC fined him $20 million, alleging the tweet was fake.

If Twitter negotiates and accepts a lower price for the sale, it will create more headaches, experts say. Shareholders are already suing Twitter, alleging the $44 billion price tag is too low to begin with. Further lawsuits would likely follow.

Musk’s ability to rock Twitter with his own tweets is something spelled out in the merger agreement he signed with the company. Neither Musk nor Twitter are allowed to make announcements about the deal without the other party’s permission, but an exclusion gives Musk permission to tweet about it.

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Still, Musk is toeing a fine legal line when he shifts stock prices potentially to his advantage with his tweets.

“It’s something that could be looked at by regulators, especially since he has a history of tweeting things that impacted the market and in one case turned out to be untrue,” said David Rosenfeld, professor of law at Northern Illinois University College of Law. “But it’s not clear if there would be anything violent, given what we know now.”

While much attention has been paid to Twitter’s share price, this figure is not actually the measure of value that is relevant in court. Twitter’s fundamental financial performance is what determines its value and the selling price of the company. Its stock price may have fallen, but the company’s ability to generate advertising revenue has not changed significantly.

What has changed is that if Musk is unable to field more investors, he will spend a much larger percentage of his net worth on buying Twitter.

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